Bank of America Corporation (BAC) has agreed to sell its Designated Market Maker (DMM) business on New York Stock Exchange (NYSE) to global market maker, Getco LCC. BofA’s decision to move away from its market making operations is a part of its strategy to concentrate on its core banking business.
The financial terms of the transactions were, however, not disclosed. Following the closure of the deal, Getco will become the second largest NYSE-designated market-maker and would be responsible for trades in about 650 companies and 850 securities.
Concurrently, Reuters reported that BofA is closing its Brazilian private banking business and trenching nearly 40 employees.
BofA is the third financial company to announce layoffs in Brazil within a couple of months. In October, two European banks – ICAP Plc and The Royal Bank of Scotland Group Plc (RBS) – had announced layoffs in their respective Brazilian operations. However, BofA will continue to focus on growing the corporate and investment-banking businesses in Brazil and provide services to private and institutional clients.
Since last year, BofA has been trying to remove a large number of non-core assets to boost capital position and strengthen its balance sheet in order to reinstate dividend hike and meet Basel III capital requirements, without diluting shareholder value. Last month, the company announced that it would sell most of its remaining holdings (about 10.4 billion shares) in China Construction Bank.
In Conclusion
BofA’s plan to sell its DMM unit and shut its Brazilian private banking business are part of its long-term strategy to remove non-core assets from its balance sheet, as the company intends to concentrate on businesses that directly serve customers.
Also, with another round of stress test impending, BofA along with other U.S. banks including Citigroup Inc. (C), JPMorgan Chase & Co. (JPM), Morgan Stanley (MS), The Goldman Sachs Group Inc. (GS) and Wells Fargo & Company (WFC) will have to demonstrate that they have adequate capital to address potential losses over the next two years under several stressful scenarios. Further, these banks would have to go through a hypothetical market shock to prove their ability to endure domestic as well as global recession. Hence, we do not see an end to BofA’s non-core divestiture in the recent future.
Currently, BofA retains a Zacks #3 Rank, which translates into a short-term 'Hold' rating. Also, considering the fundamentals, we maintain a long-term “Neutral” recommendation on the stock.
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